Transcript
Speaker: The fees are too damn high on those products. And so actually what's happening is you're taking low-cost liquid exposures and things like credit or equity, and you're replacing it with high-cost illiquid exposures, and investors don't need that.
Speaker: And so that's where what I'd say is alternative strategies come in. That's different. There's alternative asset classes and alternative strategies. Alternative strategies are very different because what they do is they provide the opportunity for actual diversification.
Speaker: And they do that predominantly through being able to be long and short.
Speaker: episode of What's the Alternative, the show where we dive deep into the details of alternative investments. We have somebody who is more on TV talking about alts than even me.
Speaker: They call me the queen of alts. I don't know. Is he the king of alts? Maybe. um We have Bob Elliott with us, the CEO, founder, and also the chief investment officer. at Unlimited Funds, probably the only person in the business that has been working in the hege hedge fund world and the alt world longer than me.
Speaker: And so I'm super excited to have Bob here. um Unlimited Funds has their flagship fund, which is HFND, which just hit three year track record, which is very impressive and has launched some new products. So we'll get into all of that.
Speaker: But I want to start, Bob, with um a little bit about you. What's your background? How did you get into Alts? What made you so passionate about it? Hey, thanks so much for having me. it's And it's um it's great to a podcast. I feel like we we bump into each other kind of everywhere.
Speaker: yeah um You know, it's like all the alts nerds get together in various locations. We sort of go with each other and and catch up on the alts market. So this is it's fun to join the podcast that.
Speaker: that you're doing. um You know, my background, know, for folks who don't know, I i spent a the majority of my career i in the hedge fund space at ah the world's largest hedge fund, Bridgewater Associates.
Speaker: um And while I was there, I i was responsible for you creating investment strategies that were proprietary across a whole range of different asset classes. i was on the investment committee, I wrote the daily research report, um and roos really was part of the small handful of investors that helped take it from being a challenger in the industry to an incumbent.
Speaker: And the interesting thing is, through that process, I learned I basically came to two conclusions that um everyone in the industry knows, but no one will ever mention.
Speaker: Those two things are one, all of our hard work, we weren't necessarily any better than any of our other other institutional peers. Meaning basically everyone in the institutional community, we're all about the same.
Speaker: Some years, some win, some years the others win, but no one is meaningfully different from the rest. And number two, I was being paid too much, which no hedge fund manager is going to say. No one's never going to that.
Speaker: but No hedge fund manager is going to say that, but it's the reality. Because the problem in the hedge fund business is that um while hedge funds generate plenty of alpha, plenty of alpha over time, managers basically take all that alpha for themselves and fees and they leave investors, even institutional investors, not that much better off than they could do without hedge funds in the in their portfolio.
Speaker: And so that those two realities, that not better than the peers and that I'm getting paid too much, sort of inspired me to say, hey, look, I have to do hedge funds differently.
Speaker: right, I'm going to take a path that's very different from the rest of my ah my peers that are still out there hanging their two and 20 shingle. And instead, what I'm going to do I'm going to figure out how to bring diversified low cost indexing, which is obviously totally changed stock and bond investing, and figure out a way to bring it to hedge fund investing.
Speaker: Because if you can diversify your managers to improve return consistency and you could cut the fees, well, then we have a very different story about the value that hedge funds bring to your portfolio.
Speaker: Yeah, I i agree 100% with everything you just said. i i was working for a hedge fund at Russell um during the financial crisis, actually prior to the financial crisis, like going into it.
Speaker: And it was in 2007, and I'm probably not going to tell you anything you don't already know. But for our listeners, here's a little history lesson. 2007 is when the SEC changed some of the restrictions of the 40 Act that made it possible for the proliferation of liquid alternatives.
Speaker: At that time, mostly through mutual funds and the the point at which it happened, anybody who's been in the business for a while will remember it. All of a sudden, every asset manager on earth launched 120-20 and 130-30 funds or 125-25 funds or something to that extent.
Speaker: um and and And it was made possible because of these changes. And then every hedge fund sponsor was like, oh man, I can get into this market. um I'm going to put a mutual fund out there.
Speaker: um So not necessarily low cost, um and but didn't know how to market it. and was completely unfamiliar with distributing to the channel. um So we saw this huge amount of new product come to market at exactly the wrong time.
Speaker: um And then think its height, because I actually have this in a graph, there was like 1500 funds that were alternative mutual funds, and that fell down to like couple hundred um after three or four years.
Speaker: um And so that actually speaks to what I want to get into next, which is the difficulty of having these products in the liquid alt space. And it's not because they're not good products, is there's a couple of problems. There's an education gap.
Speaker: Nobody really knows how to use them. um One of the things I'm really passionate about is trying to teach ah advisors how to like put the building blocks together because they know they got to do it in equities and they know they got to do it in fixed income. But I don't think they necessarily realize that you got to do it in alts too. It's not a one-stop shop. You got to think about how do you put a couple of alts funds together in the same way you would do it complimentary in equities or fixed income to get the maximum benefit.
Speaker: And that's what I find so interesting about unlimited funds launching additional product because that makes it easier to do that. And as you and I were discussing before we jumped on, Bonrien has partnered with WisdomTree to also do that in open architecture form.
Speaker: We are actually included HFND in that product. um And so, um you know, there's that part. And then massive disservices being done to advisors and categorizations of these products you know um i always pick on morningstar and i i almost feel bad because there are some great really awesome folks at morningstar and i know that they're trying but um i feel like they should talk to hfr and like learn ah because they're throwing things into categories that are just a mishmash. Like large cap growth is really well defined, but like options based is like if you use options, you're in the category, which is like not helpful.
Speaker: um And we were talking about HFND, it's multi strat, but is it really multi strat? And like, There's a macro category, but macro funds can be in tactual allocation and it's just not helpful for advisors to be able to find good products. So a lot of managers like yourself have trouble raising assets.
Speaker: And then you find that the people who are raising assets aren't really doing alts and they just know how to package the story. um but it's not actually a product that should be considered in a diversified alt portfolio. So let's dive into that. Let's dive into you know kind of what you see as a sponsor of a lot of these products and how you kind of try to overcome that um with your educational resources and things of that nature.
Speaker: Yeah, I mean, I think when it comes to the alts world, you i think a lot of the focus over the course of the last, you know, five years, let's say post COVID has been really about finding and and getting clients into alternative asset classes. And obviously there's been a nice push from, you know, your private credit folks, your private equity folks, et cetera, real estate to kind of create. Those are all because of structure.
Speaker: not all right because diversification. That's right. That's right. On that hill because private equity and private credit is fixed income. like and that that that is That's exactly right. And I will be next to you on that hill shooting, continuing to shoot.
Speaker: yeah We'll be in the rabbit hole together. We'll be in the rabbit hole together. And I think that's done. um And I totally agree with you. Those are basically just, ah you know, those are just long only positions, long only exposures dressed up with like a little accounting drag. You know, that that's basically what it is. It's not. And S.N.S. calls it volatility laundering. But go on. Exactly. Exactly.
Speaker: And and so the whole world's been focused on that. And I think one of the challenges in the world is that those strategies provide no diversification benefits to your portfolio.
Speaker: None. If anything, they're detrimental to your portfolio because the fees are too damn high on those on those products. And so actually what's happening is you're taking low cost liquid exposures and things like credit or equity, and you're replacing it with high cost, illiquid exposures and investors don't need that.
Speaker: And so that's where what I'd say is alternative strategies come in. That's different. There's alternative asset classes and alternative strategies. Alternative strategies are very different because what they do is they provide the opportunity for actual diversification. And they do that predominantly through being able to be long and short assets at various points in time. And so when we talk to.
Speaker: we talked to advisors, almost always the first thing i put up is a chart basically saying of all the assets in the world, what are the most diversifying assets that you can find that you can include in your portfolio?
Speaker: And when you look at that, there's basically three assets that are the most diversifying to a standard 60-40 portfolio. It's commodities, diversified commodities, gold, which people are finally learning a little bit about recently.
Speaker: And then the last is diversified hedge fund strategies at low cost. So something like global macro is basically the best bang for the buck diversifier you can have in your portfolio. And it's why it's basically why I started unlimited. I said, look, there's three things that diversify 6040 portfolios. You can go out and buy Gold, a lot of options for that. can go out and buy commodities, great options for that.
Speaker: There's no good options out there for diversified hedge fund strategies at low cost. And so that's what I'm going to focus on because those can be meaningfully complementary to clients' portfolios. And when they look at that, and they look at that sort of theoretically and then look at it practically, like the through time picture of how those strategies have performed relative to traditional portfolios,
Speaker: Almost every time I see sort of like a light bulb go off and they say, ah wow, these can actually provide diversification benefits to my portfolio. This really is what I should be focusing on and not those alternative asset classes, but alternative asset strategies.
Speaker: Absolutely. it's wrote the curriculum for the Kaya Fundamentals of Alternatives ah module on this subject, um diversifying versus non-diversifying alternatives and like thinking about how you do portfolio construction from that.
Speaker: um I did that about two years ago. um Me, Phil Huber, um and a couple other names that you would be familiar with were asked by Kaya to write that those modules, and you will see my face in the module if you take the course.
Speaker: um because they actually had me video the modules. So apologies, it's not as if you don't see me everywhere as it stands today. But I'd love to get your thoughts how you've been able to do it low cost.
Speaker: And the other thing is, have you run into this? Because I know our partners at AGF have to do an educational lift on how the SEC makes you report your fee versus what your actual fee is because of the shorting aspect. And I ah try to explain that there's some phantom fee that's added into your expense ratio.
Speaker: that's not actually real and you're being held like you have a higher expense ratio and you're in reality you don't. Does that affect you as well in the strategies that you run? Yeah, I think one of the one of the challenges is for any alts investors really trying to think about how do you craft a product that um delivers those returns, but also fits into the norms of the industry. And I have to be honest, like it took us a little while to learn all the nooks and crannies of the things that were needed to do this.
Speaker: Yeah. um And so part of the way that we go through that process ah you know, with our with our strategies is that we're using um predominantly futures exposures in our underlying strategies, which actually the ETF wrapper is pretty good for the for that sort of thing, because um you can get a good, you know, you can get medium turnover strategies in an ETF wrapper without ah a lot of the sort of typical tax effects that you get, say, with with a traditional LP structure where you're getting maybe 60-40 tax treatment or K-1 ordinary income treatment.
Speaker: You put that into the ETF wrapper and ah and only basically experience having to pay out an ordinary dividend on an annual basis. And so that's pretty efficient. And the futures also are nice because um they don't incur, you can basically engage in short positions without incurring the phantom fee costs that the SEC has on borrowing costs. and so um And so that's kind of how we work through that.
Speaker: Futures are also just happen to be beneficial um because they, because they they're the in general, the most liquid efficient way to express, you ah positions, directional positions and large liquid asset classes. And so that's how we're really, that's how we construct these things that has sort of the efficiency of execution and the efficiency of sort of meeting the nuances of the accounting of costs in the industry.
Speaker: Now, i i was on a podcast yesterday ah talking about synthetic leverage and derivatives as synthetic leverage. You see a lot of that in mutual foreign ETF format because of some of the restrictions on actual leverage in the FortiAC.
Speaker: So using derivatives gets you through that. But one of the problems that arises, and I'm curious if this is something that you look to address when you're talking to folks about this is that if I were to go to Morningstar, like most advisors will go to Morningstar Lipper and there's that little box, you know, the one I'm talking about where it's like, it's this much in fixed income, this much in equity whatever, because you're using derivatives. That means that you have margin and you have to have something and as collateral and it's always treasuries, right? So then when they look at what you actually hold, it looks like you just own a bunch of like,
Speaker: treasury bills which you don't um and because the exposures on morningstar are looking at like not the exposures or what the views you're being expressed through the fund, but like literally what the fund functionally holds.
Speaker: It looks like you just own a bunch of cash. So can you talk a little bit about why that is and how an advisor might be able to understand that to get ah better understanding of what the actual views being expressed are um versus what Morningstar or Lipper is gonna show?
Speaker: um Because I think that can be really confusing. Yeah, i do a lot of these platforms were structured and designed when people were investing in individual stocks, right? You're like a very you know large cap value manager or something like that, and you're buying 30 boring stocks out of the S&P 500.
Speaker: um And so ah the the sort of tech whizzes haven't really caught up with the fact that there are more securities in the world ah than just single name equities. And so when they look at these products and try and put them into their various platforms, i mean, we have some times where um you some of these platforms will only show cash security positions, meaning they'll look at they'll they'll pull up our funds, which hold futures predominantly.
Speaker: And an advisor will say, why are you holding only cash in your portfolio? Like literally only cash in your portfolio. And you're like, obviously, how are you generating those returns only holding cash? Well, it's not because it doesn't capture the actual positions that we have. And so ah You sort of have two choices on this one.
Speaker: You can go to you know more sophisticated or expensive platforms like Bloomberg does a pretty good job ah in terms of capturing what's actually in there. Or you can go to the funds, the product pages themselves, which I know is not something that people are necessarily inclined to do. But I i find when you're when you're working in this world and you want to actually understand what people are doing, go to the product pages.
Speaker: Every single ETF has to publish its positions in all the securities it holds every day with a one-day lag. And when you click on that position, and I do this all the time with, you know let's say, yeah friendly competitive products as well to try and understand what's going on with them.
Speaker: you will get what you want, what you need in order to understand what they're doing. So we have by by, you know, QSIP level understanding of all the different positions in there. And so that's mostly what we guide people to do.
Speaker: We also have I've found it useful and this is kind of, you know for any of the issuers ah that are that are listening to this. I've also found really helpful just communicating to people, ah your your prospects and your clients on a regular basis, just a qualitative overlay in terms of like, here are the positions. Here's the basic exposures of the fund.
Speaker: You we can get into the nuts and bolts, but like, by and large, we're short the dollar and long goals. Like that is a... And that's the sort of conversation that if you bring that and particularly proactively push it to advisors, they really appreciate it because they can go talk to their clients. Like, why is, you know, why is the global macro strategy doing well? Okay, well, it's because it's long gold and short the dollar, like as a simple example.
Speaker: And that's very easy. So just helping do a little bit of the lifting for the advisors in terms of their ability to communicate with their clients goes a long way. Yeah, no, I completely agree with that.
Speaker: um i think that as you stated, um Good sponsors will do that. um I do a show for um ETF Guide called ETF Battles.
Speaker: Usually once a month, I do it for um um for them, ah for Ron and the team. And they love to put me on when they have anything that is in the flavor of alts, even if it's not truly an alt.
Speaker: If it has a flavor that might be a little complex, like we did some levered ETFs like two times S&P levered kind of stuff the other day. um And um one of the things I said is a good sponsor, and I would call unlimited funds a good sponsor because I've gone to your website and I've seen your insights and I've read your information and I see you on TV and I see you at conference. appreciate that.
Speaker: But you and I, I feel oftentimes you and I are doing like the Lord's work because we're like trying to be honest and out there. um But there's so many others that are just trying to push product and like not being honest about it.
Speaker: um I always say sometimes you have to look a little harder. Sometimes you've got to open that perspective to see what's actually going on there and how people are gaining exposures because they're not always transparent about it on their website.
Speaker: um And you think it's one thing and then you go into the prospectus and you're like, oh, my God, that's not at all what I thought it was. um You know, I think with long short, that's important. There's long short equity, which I think Morningstar has that as a category. But then I think they also have like a hedged equity category category. I might be wrong.
Speaker: It might have been that it was once called long short equity and then they changed it to hedge equity. i can't remember. Either way, those are two different things. Long short equity means you are long and short. Hedged means you are maybe expressing your short views through options based products.
Speaker: And those are different things. um and And sometimes you need to go into the prospectus to decide and figure out which one of those things they're doing i would argue you can just look at the expense ratio and it'll tell you right away because if it's really high um it's probably ah like actually shorting stocks um and then if you go into the prospectus you'll find out what the actual cost of the fund is but it gets to that point where you're talking about that phantom margin cost and the phantom dividend payment cost that they make you put back into the expense ratio
Speaker: um and um But I will say that sometimes not every sponsor does a great job of explaining those things through their materials, which makes it hard for advisors.
Speaker: So we always try to help advisors through that. But when we can work with sponsors, like say in unlimited funds, that does that with a consistent basis so that makes it really easy for the advisor to a set return expectations. Number one problem I find in alternatives.
Speaker: At the end of the day, all of the problems could be completely avoided yes sponsors made sure that advisors understood the return expectations of a product.
Speaker: You will never, ever get fired for poor performance if the person understood when you will do well, when you will do poorly, and then aren't surprised when those things happen in those conditions.
Speaker: And then because it also makes it easier for them to talk about it because then they don't have to call you and be like, what's going on? They just know because you told them and you're putting out consistent information. And global macro is really interesting.
Speaker: Global macro and managed futures get thrown together a lot, but they're not one in the same. They have, they, they, um, what's the word? They are not, um, They're not repeating, but they're rhyming.
Speaker: um They are similar in what they offer from a risk reward perspective intent when they outperform. But the one thing Global Macro does that is not true for managed futures is you can have a Global Macro fund that consistently does okay, regardless of market conditions, um because it's a little different. So can you to talk to us about what is Global Macro?
Speaker: you know How do you evaluate a global macro manager? And then to what you were just talking about, when you are reviewing you know the monthly updates from a global macro manager, what should you expect for them to be communicating with you to understand what they're doing?
Speaker: Yeah, I mean, I think you're totally right. And if ah anything, actually some of the categorizations actually jam managed futures and global macro together. And the reason why they do that is managed future strategies and global macro strategies often trade the same opportunity set.
Speaker: by and large, meaning they'll trade global currencies, commodities, fixed income, credit, um equity indices, things like that. But the way that the two strategies work are pretty different.
Speaker: and And so um most managed future strategies are predominantly focused on using price information to generate views on markets. um often trend following, although not exclusively trend following the recent price action. That's super beneficial because there is a um you there's a real discipline of following price action that can be important ah that you know generates good returns, particularly in down market environments and defensive periods.
Speaker: where you might not have the innate discipline to follow that. Global macro, the way i'd like to I like to think about global macro is um it's related ah to managed futures from the opportunity set, but the perspective that managers take on the markets is different.
Speaker: They're predominantly looking at ah conditions where what is priced into various asset markets is inconsistent with projected views of what will happen either with macroeconomic, the macroeconomy, or with policy efforts.
Speaker: And so, ah you know, the simplest story there is, say, the macroeconomy is giving some indication that, you know monetary policy should be less easy than it is and the market isn't pricing that in, those managers will take advantage of that by putting on positions, whether it be in short rates or in bonds.
Speaker: Whereas the managed futures folks, whatever the price trend has been, that's what they're going to follow, whether it is consistent with the macroeconomic conditions or inconsistent. So that's kind of the the difference.
Speaker: I think part of the benefit of the global macro side of things is, as you mentioned, in some ways, it's a bit more of what I call all-weather alpha, um poking a little bit of fun at the old shop.
Speaker: um and and And what I mean by that is because of the nature of that approach, what it means is that um those managers can generate positive returns during positive asset market environments. I mean, for instance,
Speaker: Recently, global macro managers have done extraordinarily well. It's been one of the best periods for global macro in some time, but they can also generate positive returns in negative or weak asset market environments. For instance, probably the in the last 10 years, the other best environment for global macro was 2022 when assets were going down.
Speaker: Right. And so you get kind of because in both cases, there was though there were those mispricings, like, for instance, recently in the dollar or in gold, or back then it was in stocks and bonds. And so the ability to sort of flexibly think about the world, think about the market action and be able to put those positions on means that um means that, you know global macro can generate ah a more consistent return than a lot of other alpha strategies that are out there. Yeah. um So I started running all portfolios just prior to the financial crisis and 2008, nine and 10, I was running
Speaker: um basically a liquid alt model, but mostly with mutual funds at the time. But I was i was managing at Parapasue to a hedge fund model with actual hedge funds.
Speaker: And one of the things that stood out to me is at the time, there was no global macro offerings in the mutual fund world. There was a lot of CTA stuff. Guggenheim had a bunch of stuff.
Speaker: um And then um But there was no global macro. But in the hedge fund world, there was tons of global macro. And the one thing that stood out to me through that period is both my Managed Futures products and my global macro funds outperformed.
Speaker: But the global macro funds like rushed in ways that I can't even begin to fathom through the financial crisis. And then out of the financial crisis, they were able to maintain strength and performance that the managed future funds just weren't.
Speaker: And you mentioned trend following, and I always found this interesting. Clearly, there was a trend coming out of the financial crisis because it was a trend straight up. But Managed Future strategies do trend follow, but it doesn't always equate to meaning that it would trend follow upside momentum and upside trends as well as they do downside trends.
Speaker: And um they tend to almost be perfectly negatively correlated with equity markets, which makes them so hard to own. So having global macro strategies be more and available in um liquid form is, I think, a good thing because they do, to your point, start to be more persistent.
Speaker: But can you speak to a little bit about, you know, you did touch on it, but dive a little deeper into why, you know, you will see that almost perfectly negative correlation of managed futures, but not necessarily the same for global macro.
Speaker: Yeah, well, I think part of part of the story, this is this ah the financial crisis is a good example and I think gives a good case study in terms of the difference in the strategy. So ah i I love the fact that we can, that it's rare that I get to talk to somebody who had lived firsthand through the global financial crisis.
Speaker: And I have to say, like um those of us who went through that, who are up close to markets, have just like a totally different perspective on how financial markets work and things like that. So, um and we all learned a lot of lessons there. And I think a good ah good differentiation between both of ah ah between managed futures and global macro happens there.
Speaker: If you go back to March of 2009, of two thousand and nine which is when the Fed basically said that they were going to institute large scale QE in order to turn the economy around.
Speaker: If you were a managed futures manager, what you'd be doing is sitting at S&P 500, 666 and saying, this has been going down a lot. I want to follow that trend and continue to be short.
Speaker: If you're a global macro manager, you say the largest QE that has ever existed in modern financial history is probably a good time to buy. Right. And those two things are two totally different perspectives.
Speaker: Now, over time, trend following obviously generates good ah good returns and good diversifying returns because of the discipline that it brings. But it isn't a perfect solution because there are critical policy or macroeconomic turning points that macro managers, I think, in general, are better positioned to take advantage of. And so, I actually remember sitting at the, I guess, the equivalent of the investment committee at at Bridgewater at the time.
Speaker: And we looked at that we said, whoa, everything's changed. The world has changed because of this quantitative easing. It's hard to believe that there was like a time when people didn't really even understand quantitative easing. It wasn't even a thing. And it wasn't a policy ever pursued before. Like now it's old hat.
Speaker: But back then it was a huge change in policy. And we said, this will mark the bottom. This will be the critical turning point in this cycle. And so we're able to take advantage of that and deliver the ah results that you described, both in that in the down and then back in the rebound.
Speaker: Yeah, um i started working in the alt world just before the financial crisis. And i whenever I tell the story, when people are like, how did get into alts? I'm like, It seems weird to a lot of people that I say I became so passionate about alts during the financial crisis because I was like, oh my God, I wish my dad could own some of this stuff because I was seeing like global macro management.
Speaker: At the same time, like other stuff was actually blowing up and causing the crisis. Like the hedge fund I worked for went under because merger ARB, I'm sorry, MuniARB blew up.
Speaker: um and And so it was such a weird time to be in the space, but I always felt like hedge funds were the canaries in the coal mine. like We started to see like liquidity problems with some of our asset-based lending funds in mid-2007, which was before everything started crumbling and it was like, oh my God, something's going on here.
Speaker: And then when you saw that value sell off that August, do you remember this? um you for sure we yeah Yeah, we knew and understood that that was a margin call issue with hedge funds having stuff that they had no liquidity and having to sell their most liquid stuff.
Speaker: like MOPs were another thing where coming out of the crisis, I was like, well, it's such a no brainer to buy MOPs right now. um And I made a ton of money doing that, but that was like an alt. and And for me, it was like, oh, my God, this was the point at which I thought, OK, I now am fully converted. i am preaching the gospel of alternative investments. i You have changed my life and I will never stop. And that's where it all started for me was during the financial crisis.
Speaker: yo um ah you you You talked about a little bit, like how was that for you? And is that where kind of this idea of, like okay, we can do this better, its cheaper, and we can make it better available to other people? Because that was the moment for me that I was like, we need to make this available to the broader investment but investor base because I feel like there's a cheat code and it should be available to everybody.
Speaker: Yeah, yeah. and And I think for me, you know, when you're in ah when you're in a hedge fund, and and this sort of speaks to the overall hedge fund industry, like everyone is trying to prove to, whether it be their clients or themselves or the public, that they are the master of the universe. And the interesting thing is any ah any person who's been in an institutional quality hedge fund,
Speaker: will have experienced meaningful underperformance relative to their peers for an extended period of time. It's just how it comes. Sometimes you're right, sometimes you're wrong. Alpha is by no means a up and to the right straight line.
Speaker: It is a over time up and to the right straight line, you know over over time up and to the right, but it is a line with a lot of chalk. you've got to be contrarian to get that big outcome. And there at some point in time, we're being contrarian is painful.
Speaker: um There's a book I read. And you're wrong. You're wrong a lot. Like, it is hard to believe how wrong you are and how often you are yeah wrong. In order to generate alpha over time, you have to be wrong a lot.
Speaker: And as a result, you have you will underperform your peers over time, even though when you look at the hedge fund industry in aggregate, what you see is the aggregate of the managers generate pretty good returns, particularly if you if you take the fees out.
Speaker: They generate actually quite good returns over time. It's just that any one manager, they're like volatility around the wisdom of the overall industry. And so that's really when I when I when that finally crystallized in my mind, in part, thanks to a extended challenging period relative to our peers, I realized, hey, look, the the right solution to this is not to try and beat every other institutional hedge fund manager because it is a fool's errand.
Speaker: Right. The best thing to do actually is to diversify across the managers, because over time, what you see is that diversified portfolio of managers, the wisdom of their insights in aggregate is actually a more consistent outcome than is trying to pick any one individual manager.
Speaker: You know, in some ways, how many people see investing in the S&P 500 like an index fund is actually better than trying to pick, you know, the 10 stocks that are going to outperform. Absolutely. um You know, you talked about low cost passive, but in a way global macro is never truly passive.
Speaker: um So how do you do that approach in a way where you can have a lower fee and have a more persistent and consistent are return profile?
Speaker: while being kind of like pseudo passive, because again, you're obviously making bets based on house view. um But how do you kind of, how how how do we do that where it's like active, but you're doing it and best you can in a passive vehicle?
Speaker: Yeah, i mean I like to describe what we're doing is alpha indexing. That's probably the the best way that I, i like the best phrase I've come up with, although I'm all ears for other better phrases for it.
Speaker: um You know, what we do is, functionally what we've done is we've basically planted a bug in 500, in the 500 largest macro managers investment committees and understand exactly how they're positioned to what they think is gonna happen. And then we just take that understanding And we basically net out what is the net view across the biggest, most liquid markets in the world.
Speaker: And with that understanding, put on those positions through the ETF wrapper, through holding futures like we talked about. and the way that we do that is very different. You know, a lot of sort of diversified hedge fund strategies, fund to funds for people who've been around for a while.
Speaker: What they'll do is they'll invest, they'll dabble in this fund and this fund and this fund and this fund. And that in general is, you know, creates a diversified portfolio. The problem is you're paying the managers two and 20 in general, and then you got to pay yourself something. And now we got fees on top of fees and that's terrible. And so what we did instead is we developed technology that allows us to infer how those managers are positioned by looking at their returns, which we actually get in relatively close to real time.
Speaker: And if we can infer how they're positioned from that return information, we can then understand their positions, the wisdom of the crowd, without having to pay any of them.
Speaker: the fees that they typically require to understand how to position. And so what I like to say is I hired 25,000 hedge fund managers who are all running around making lots of spending billions of dollars making decisions and I'm not paying any of them.
Speaker: It's like magic. In the sense of I get their insights without paying them. And as a result, what I can do is pass that on to the people who invest in our products because I don't need to charge two and 20 because I'm not paying star portfolio managers big bucks to make the calls that they are. I'm paying those managers nothing. And we're using technology to look over their shoulder.
Speaker: So what you just described sounds a little bit like hedge fund replication, which I have When I was at Russell, i was given a task. It was like one of the first things they asked me to do.
Speaker: And I didn't realize that at the time, was just like a 20 something year old and was just doing whatever they asked building out the model. um But it ended up being hedge fund replication. Basically they said like, we have these exposures and we're gated at the moment and we need to hedge out these exposures. So can you please,
Speaker: take these exposures, put it in a um ah regression model, and then figure out how what we need to buy hedge out, like neutralize these exposures until we can get out of them.
Speaker: um But the problem with doing that, like it was easy for me to do it at the time because we owned those products. So we knew what the performance was in real time and we knew what they owned in real time. But when you're doing it from like afar, you're using like an HFR benchmark. An HFR for all the good it is, um it is a self-reporting vehicle. It's not like Morningstar where just pulls the SEC reports, which you know they have to do all the time. HFR is very much self-reporting. So a lot of managers when they're doing pretty poorly, don't self-report.
Speaker: um And so you have like a bias in the sample that doesn't always reflect like the broader view. It's also at a substantial lag.
Speaker: um So your R squared, your adjusted R squared can be off a little. How are you able to do that? Like you said, almost in real time. um like how are you able to get the data um is there something someplace you're looking that others don't or um just your institutional knowledge from having worked in that space like what how exactly are you able to do that without having the bias in the sample and the lag in the data Yeah, so um the great thing is there's been a um there's been quite the evolution in terms of ah aggregators of hedge fund performance over the course, you know, basically back since your HFR days, only looking at the HFR, um where um where there's now you know almost close to a dozen different ah entities that are gathering
Speaker: hedge fund performance. And you're right that ah most of the most of the reporting is is done um you know it is done proactively by the funds themselves, although there's been a real institutionalization in the index construction so that things like um poor performers can't really drop out of the of the indexes um the way that if you go back 20 years, the indexes sort of had some of that issue.
Speaker: Thank you for reminding me. It's been almost 20 years since I did this. Yeah. Come along with it. we we yeah yeah we um way
Speaker: and um And, you know, I think through that process, we now have ah pretty good, basically all the major funds that you know, report to one or more of these providers these days.
Speaker: And so we use all of them because essentially you can think about they're all like slightly different samplings of the industry and we combine them all together in our process to get a good understanding of how managers are positioned. Most of that stuff is um the the best in class stuff we get a few days into a subsequent month. So we actually have pretty timely understanding.
Speaker: of performance. We also have indicative performance data, whether it be weekly or daily from other sources that maybe are incomplete, more incomplete, but they are quite indicative of ah of returns, meaning they're highly correlated. They may not be the exact same, but they're highly correlated. And we can use that information to get a very timely sense of how these funds are performing.
Speaker: The second thing that we're doing, so we have a pretty good timely sense of how the managers are performing. and pretty broad coverage. The second thing we're doing, which is really important, is in instead of going back to so sort of the the old school regression techniques, which kind of had a challenge because regressions are by definition an average over a period, right? You have to have enough time frame in the back history to be able to develop those.
Speaker: So, you know, sort of ah more traditional replications might average the last 36 months or there's a meaningful product in the market right now that's averaging the positions, the returns over the last 10 years.
Speaker: Like knowing hedge fund positions over the last 10 years on average is a useless thing to yeah to know. What you want to know is their positions today and how they're changing. And so what we do is we use um ah ah modern machine learning. It's really like a sophisticated Monte Carlo simulation to probabilistically infer today's positions by observing today's outcomes, but in the context of the previous portfolios that describe the previous returns, because one of the neat things that you realize as an institutional manager
Speaker: is that funds don't instantaneously shift positions. This is really an important concept, meaning like you can't go long stocks to short stocks if you're running $5 billion. dollars i mean, even if you're running a billion dollars, you can't do it day to day. it's not how it works.
Speaker: You pay too much transactions costs, you get eaten alive on it. And so what you do is you incrementally change your views over time. And so if you think about it, any one manager and any aggregation manager, say 500 managers, they're incrementally changing their positions over time, which means that there's actually a lot of information value in that path of returns because today's outcomes are function of today's positions. Today's positions are adjacent to yesterday's.
Speaker: positions and yesterday's positions can be observed through yesterday's returns. And given that there's not that many probabilistic portfolios that describe that are connected to each other adjacent to each other that describe today's outcomes and yesterday's outcomes and then the day before and the day before and the day before.
Speaker: And so what we run is basically a big probabilistic model that basically says, okay, what is the likely positions that they're holding today given the returns that we're seeing? but also constrained by the fact that they have that that portfolio has to describe recent returns through time. And so it gives us a much more tactical sense of the alpha positioning because we're not averaging the last three years or anything like that.
Speaker: What we're doing is solving for the portfolio that's describing the returns today in the context of those past portfolios, but not averaging those past portfolios. And that's allowed us to capture tactical alpha positioning much better than previous efforts at this.
Speaker: And probably much quicker to be able to catch those things. um So as somebody who kind of is looking at a big universe of managers and also as somebody who was in the space for a long time, um if an advisor is looking at global macro as a category and is evaluating opportunities, ah what are some of the key things they should be looking for or questions they should be asking so that they can better understand how to differentiate each manager from each other?
Speaker: and what their potential value proposition or alpha um opportunity might be when doing selection. Well, I think, you know it really comes down ah to to process. And so there's there's a wide range of different strategies that are out there, say, in the macro space.
Speaker: Most of what you see is ah is discretionary. And so like I talked about in terms of you know even the very best discretionary managers, some years they'll perform better than the index and some years they'll perform worse. And so often by yeah looking at proprietary managers, proprietary discretionary managers, what you're adding is a lot of sort of noise around what is probably generally a pretty good return and a pretty good alpha opportunity, but it's noisy around that.
Speaker: And that's one of the challenges. And so if you see a strategy like that, you have to acknowledge that there are going to be times where you're going to have to be explaining away bad performance relative to anything.
Speaker: And there'll be times when you're going to benefit from it. Then we get our replication world where I think there is, you factor based replication has really been, you know, has been hot for a long time, where I think one of the challenges there on factor based, meaning like,
Speaker: carry trend concepts like that, you know, they're, they're big institutional asset managers that have products like this is that those products, those um smart betas or factors in the markets, sometimes they make money and sometimes they don't.
Speaker: And so that's, I think one of the challenges is that that's not actually how hedge funds manage their portfolio. You don't go like, well, I'm just going to hold carry forever because that is, you know, up into the right.
Speaker: because there's sometimes when Kerry's good and sometimes when Kerry's bad. And so if you see a strategy like that, you have to acknowledge that there's going to be meaningful, long periods of drawdowns related to the fact that those factors are not necessarily persistent.
Speaker: And then, you know, the alternative option, which is what I what I what we're trying to do is understand the positions in real time. Basically, if you understand the positions in real time, then what you're doing is you're you're basically following how these managers are creating their positions, whether it is discretionary, whether it is ah systematic, whether it is pro some of the simple the smart beta factors, whether it's against smart beta factors like All of those different things, that agility, and that's really what I'd emphasize is like, does your manager have agility and do they have essentially diversification in the way that they're developing their strategy? Because if they have agility and diversification, they're much more likely to produce ah high quality returns over time than if they're ah sort of fixed in their decision making or very reliant on their own you know own proprietary or discretionary views.
Speaker: Yeah, the the phrases you see in the hedge fund world is discretionary macro systematic trend. um That's typically like the the things you'll see because there's always like the category and then the subcategory. So it might be macro and then they will have a subcategory. It'll be like discretionary systematic trend.
Speaker: um And that differentiates kind of what you're talking about. Now in the mutual fund ETF world, they don't do that. It's just macro everything. um And I do think that more of the discretionary guys get thrown in tactical allocation, whereas like the more systematic folks get thrown into macro, but they're both doing something similar.
Speaker: um So that is an important caveat. But yeah, to your point, understanding that. And I think a lot of people understand and know that there are some macro guys that got really famous because they got a couple of discretionary bets, right? Like Soros is a great example of that.
Speaker: um and And so just understanding like who you're dealing with, because if you're dealing with somebody who's doing a discretionary macro trend, you're really betting on the manager in the same way that if I'm evaluating a mutual fund of an active but guy versus a passive, like I...
Speaker: you Peter Lynch, Will Danoff. like i I just have a belief that this is somebody that can outperform on a consistent basis, but also understanding that they're going to take bets that sometimes they're going to not get right to your point of you get it wrong sometimes.
Speaker: um But your overall belief is that more times than not, they'll get it right and that will generate alpha for you. So yeah, to the it's that's a good framework of which to kind of think of the space.
Speaker: And I would argue that you could probably pair those two things together to get you know a more holistic exposure to macro.
Speaker: Yeah, I mean, i've I, yeah when we talk to people, for instance, about ah our our macro but product, um people say, well, is it discretionary or is it systematic? And the answer is both. And I i think um ah sort of people outside the hedge fund industry often will draw relatively strict distinctions between those two points, meaning what is discretionary, what is systematic.
Speaker: And the reality is that I think the the most sophisticated macro managers Think about that as a spectrum. And so some are often a little more on the discretionary side and some are more on the on the systematic side, for instance, the ah my where I started my my career was more on the systematic side, but it's not black and white. And part of the story, the reason why it's never black and white is because discretionary people are using, you know, quantitative inference, let's just say, to develop their understanding and their views. It's not just like they walk in. No, there's no macro manager in the world that's like sitting at his desk, you know, ah looking out the window and being like,
Speaker: short the brazilian real you know like it's just like not how it works you know they're looking at lots of quantitative information and and in some ways is is systematic in the way that they're processing it even if they're not literally systematic in their approach and similarly systematic managers will often know there's only so much you can systematize like part of the whole point of system systemization is to capture most of what you can understand but the you know covet happens and like Things are different in COVID than are in your sample set, as a simple example. And so, you know, having a little bit of the the quality the the discretionary with the systematic is is almost always the case. And so what I like about looking at sort of all the managers is you kind of get the best of all worlds, which is you get the systematic people, the discretionary, all their sort of collective, you know,
Speaker: ah fighting with each other about trying to figure out what's going on and what bubbles to the surface, that wisdom of the crowd is actually pretty good over time um is what you find and and more consistent than relying on any one of these different things. It's it's diversification of approach in addition to diversification of managers.
Speaker: Yeah, I love that. I think that's a really good way to put it. Now, unlimited funds um started obviously with your flagship, the jet hit it's three year, but you've also recently launched some additional products.
Speaker: um How have you found that your approach has been able to transfer to other products and you know why are you excited to bring some additional products to market today? Yeah, I mean, i we've we've we've been lucky to be a startup issuer that's been around for three years. So many folks don't make it to this point. Well, I think that's a testament to you.
Speaker: I really believe that. I appreciate that. um You know, we launched our first product, HFND, which in a lot of ways you can kind of think about as like the spy for hedge funds, meaning it's meant to match institutional hedge fund returns.
Speaker: which you know is you know and it's ah a multi-strategy product made up of ah replications of basically the six largest um hedge fund styles. I think one of the challenges is that you know most institutional allocators are looking for a cash plus or a bond plus type benchmark. So while that strategy has basically done what it's supposed to be doing and I think has been a great proof of concept showing that we can track how hedge fund managers are performing.
Speaker: I think ah you know when we talked to advisors, they were basically they basically gave us two points of feedback. And this is this was great about the RIA, the ETF and RIA community. It's like we go, we talk to advisors, people tell us, give us the input and we can design products that actually help advisors with what they what they need and what they want.
Speaker: is they basically said two things. One, ah running a bond risk is too low in terms of, it's not cash efficient enough for our portfolio. We want something that's more like equity index risk. And we're like, great, we can do that.
Speaker: That's the beautiful thing about doing what we're doing. We understand the positions. We're exposing them in futures. It's just literally turn up the dials. Like how do you how do you run essentially a 2X target return strategy? Well, we take the positions and we multiply them by two. It's not that complicated.
Speaker: So that's really good. So we could deliver an equity-like ah return profile equity like risk profile. And then the second thing they said is don't necessarily give me all the strategies combined into one.
Speaker: Why don't you break out the individual strategies because like global macro, equity long, short, managed futures, fixed income, etc. Because every portfolio is slightly different.
Speaker: People have different needs. People have different gaps in their portfolio. Maybe you're looking for an active equity manager and you're not so happy with it. And so you want something like equity long, short, or maybe you're looking for a true you know, all weather diversifier bucket as part of your, you know, 50, 30. And that's where global macro fits in great. Or maybe you want something defensive that's little more cash efficient with our 2X managed futures type strategy, right? That kind of gives you that managed futures, but, you know, reduces the line item risk. And so that was really great because we we we basically said, okay, so let's launch the individual strategies at a 2X.
Speaker: And it has been fantastic. I mean, we've been, of course, blessed with very strong performance across many of those strategies. But I think probably the thing that matters more to me is that I can see advisors with all sorts of different needs, looking at this product suite, whether it's sort of conservative, just want a little diversification against 6040, all the way to like building a, you know, a real, a total return profile strategy that, you know has a low correlation to assets.
Speaker: We now, I feel like have something for everybody and it's, and it's working. um and And it makes for a lot, makes for very compelling conversations with the, with the folks that we're talking to. Awesome.
Speaker: Yeah, I love that. um As somebody who builds out the portfolios, I like to have the pieces all right because, you know, sometimes i I find like a gem of a portfolio where I can't use it as my sole exposure alts, but I want to build around it um for you know one reason or another. and And being able to have like the building blocks I think can be really interesting.
Speaker: and um And so I'm glad that you're doing that. Now, um you know we're coming up on time. um Is there anything i didn't ask you that you want to um to mention ah to our audience about what you're doing or you know just ah anything you're working on?
Speaker: ah Where i can they find you? All that good stuff. Yeah, I mean, when we started Unlimited, we talked a lot about our hedge fund approaches here. And I also spent some time in the venture capital side of the 2 in 20 business as well, actually, um after I left Bridgewater. And so um when I think about Unlimited, I think about how do we bring, ah you know, low cost diversified 2 in 20 strategies to investors.
Speaker: We started with hedge funds because that was a lot of our our experience. But now, ah having built out, I think, a very compelling product set in the hedge fund space, we're now turning our attention ah to the rest of 2 in 20 and starting with something that we call Liquid Venture, which is a product that we're actively working on. The idea being, how can we give the everyday investor access to equity, real equity,
Speaker: in top quartile venture backed businesses and do it without the two and twenty fees and the illiquidity that that typically exists ah in you know traditional venture capital ah structures. And so stay tuned for that. That's the next thing that we're up to as part of our sort of broad goal of building uh what i like to say is the vanguard of two and twenty so that's um that's pretty exciting if folks are interested in so in learning more about our products uh unlimited funds.com i guess it's here in the background uh or the etf specifically our unlimited etfs.com um and uh and if you want to follow uh me on
Speaker: I don't know, all the various socials. I'm under the Bobby Unlimited handle in most cases, or you can probably Google my name. And I'm as famous as the Bob Elliott of Bob and Ray, the old time radio program. So I am on the front page of your Google search results, which is pretty exciting.
Speaker: So there go. Awesome. and we'll put all those links in and the show notes as well so people can find you i really appreciate having you on the show it's not often that i have the opportunity to talk shop with somebody who shares my vision and my like my goals in terms of preaching the gospel of alternatives and why we're doing it and like the the incentives and the motivation behind it very rare you're probably one of like two people on earth that share the vision that i do so having you on the show is amazing i really thank you for your time uh for everybody else i will put all of bob's contact information in the show notes you definitely want to follow him
Speaker: He is not afraid to challenge the status quo and to say things controversial. That's something he and I have in common. um So he's a good follow and he'll be thought provoking and make you really think about things and challenger challenge your knowledge of this space. And I think that's a good thing.
Speaker: Thank you so much for tuning into this episode. As always, don't forget to like ah like this episode. Don't forget to subscribe to the podcast.
Speaker: Leave us a review. Put a comment down. Who do you want to hear from? What would you like to learn more about? We do pay attention and we try to um take that information and use it on future episodes.
Speaker: Appreciate your time. Until next time.
Speaker: The opinions expressed on the What's the Alternative podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or in any specific security.
Speaker: This is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.
Speaker: Any past performance discussed during this podcast is no guarantee of future results. The guests featured on this program are participants on Bonrien Capital Management's platform.
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